Sherwin I. Ray v. Citigroup Global Markets , Inc .

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4362
S HERWIN I. R AY , et al.,
Plaintiffs-Appellants,
v.
C ITIGROUP G LOBAL M ARKETS , I NC ., et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 3157—Matthew F. Kennelly, Judge.
____________
A RGUED S EPTEMBER 7, 2006—D ECIDED A PRIL 12, 2007
____________
Before R IPPLE , K ANNE , and W OOD , Circuit Judges.
W OOD , Circuit Judge. This is a case brought by a
group of disappointed investors who lost millions of
dollars after the shares they had purchased of SmartServ
Online, Inc. (SSOL) collapsed in value. They blame their
losses on John Spatz, an investment advisor, his em-
ployer, Citigroup Global Markets, Inc., and the employer’s
parent company, Citigroup, Inc. (collectively, Citigroup).
The district court, however, granted summary judgment
in the defendants’ favor, finding that the federal claims
the plaintiffs were hoping to assert under § 10(b) and
§ 20(a) of the Securities Exchange Act, 15 U.S.C. § 78j(b)
and 78t(a), and Rule 10b-5, were doomed because plain-

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2 No. 05-4362
tiffs had no evidence of loss causation. The district court
also dismissed plaintiffs’ state claims, on the ground that
they were preempted by the Securities Litigation Uniform
Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f)(1).
The latter ruling is not before us, but plaintiffs would
like to convince us that they may proceed with the federal
theories of recovery. Although we have applied the favor-
able de novo standard of review to the district court’s
ruling, we conclude that plaintiffs’ claims cannot suc-
ceed. We therefore affirm.
I
The plaintiffs are more than a hundred retail investors
who purchased millions of dollars’ worth of stock in SSOL
between 2000 and 2002. SSOL was a small company in
the wireless data services business. The value of its shares
had soared during the late 1990s, going from less than
$1 per share in early October 1999 to more than $170 in
February 2000. By early April 2000, the price had settled
down to a range between $70 and $90 per share. Defen-
dant John Spatz is an institutional stockbroker employed
by Citigroup (in an entity formerly known as Salomon
Smith Barney, Inc.). Spatz worked with retail brokers
Howard Borenstein, Mel Stewart, and Angelo Armenta,
who in most cases were the people who directly advised
the plaintiffs to buy SSOL stock. Citigroup is a global
financial services firm that, as relevant here, provides
investment and asset management services. Spatz,
according to plaintiffs, was Citigroup’s top institutional
salesman, and thus his opinions carried great weight
with others in the industry.
The plaintiffs alleged that Spatz, along with two other
Citigroup stockbrokers (Francis X. Weber, Jr., and An-
thony Louis DiGregorio, Jr., neither of whom was named
as a defendant) fraudulently induced the plaintiffs to

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No. 05-4362 3
purchase ever-increasing amounts of SSOL stock by
making misrepresentations both to plaintiffs and to their
retail brokers, Borenstein, Stewart, and Armenta. The rub
was this: throughout the time period at issue—2000 to
2002—the stock market as a whole was declining. Publicly
available information tells us that the Dow Jones Indus-
trial Average stood at 11,723 on January 14, 2000, which
at the time was an all-time high; by December 31, 2002,
after interim ups and downs, it was 8,341. See Chart of
the Dow Jones Industrial Average since 1974, at
http://www.the-privateer.com/chart/dow-long.html (visited
March 14, 2007). Nevertheless, Spatz and Citigroup
falsely told the plaintiffs that SSOL was still a great deal.
They claimed that SSOL had signed substantial con-
tracts with large corporations like Microsoft, Swisscom,
Qualcomm, Verizon Wireless, IBM, and Citigroup itself.
These contracts, they said, would produce millions of
dollars in revenue for SSOL over time. They claimed that
the institutional analysts at Citigroup thought highly of
SSOL and were prepared to initiate “research coverage,”
and they represented that SSOL had obtained large
sources of financing.
According to the plaintiffs, what Spatz and Citigroup did
not say was that SSOL had problems (about which it
knew) with its current contracts with companies such as
GoAmerica, Hutchison Telecom, and Sunday Telecom-
munications. Moreover, plaintiffs say, Spatz urged them
to invest in SSOL to the exclusion of almost all other
companies. (This may well have been poor portfolio design;
whether it was fraud is a different question.) The informa-
tion about research coverage lured plaintiffs into thinking
that Citigroup (and Spatz) genuinely believed that SSOL
was a safe investment and that there was little risk in
directing their money to SSOL. In fact, according to
plaintiffs, Citigroup thought no such thing and was well
aware that SSOL was a risky investment. One clue might
have been the fact, disclosed in SSOL’s public filings, that

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4 No. 05-4362
the company had yet to derive any significant revenue
from its wireless data business. Had plaintiffs been told
the truth about the risk they were incurring, they claim,
they would have sold the shares they had and refrained
from purchasing any more shares. When the truth finally
emerged, the stock price of SSOL, which had been more
than $80 per share in June 2000, plunged to only $1 per
share. As the district court pointed out, the undisputed
facts showed that SSOL’s competitors suffered the same
fate: 724 Solutions lost 98.9% of its value over that time;
Aether Systems lost 98.39% of its value, and Openwave
Systems lost 94.35% of its value.
The district court found that the defendants were
entitled to summary judgment. It looked to the Supreme
Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo,
544 U.S. 336 (2005), for the elements of a claim under
§ 10(b) and Rule 10b-5. In Dura, the Court summarized
those elements as follows, for cases involving publicly
traded securities and purchases or sales in public securi-
ties markets:
(1) a material misrepresentation (or omission);
(2) scienter, i.e., a wrongful state of mind;
(3) a connection with the purchase or sale of a security;
(4) reliance, often referred to in cases involving public
securities markets (fraud-on-the-market cases) as
“transaction causation,” see Basic [Inc. v. Levinson,
485 U.S. 224,] 248-249 (nonconclusively presuming
that the price of a publicly traded share reflects a
material misrepresentation and that plaintiffs have
relied upon that misrepresentation as long as they
would not have bought the share in its absence);
(5) economic loss; and
(6) “loss causation,” i.e., a causal connection between
the material misrepresentation and the loss.

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No. 05-4362 5
544 U.S. at 341-42 (most citations omitted). The loss
causation element was the most obvious missing link, in
the district court’s view: plaintiffs had no evidence that, if
believed, would show that the particular misrepresenta-
tions they accused Spatz and Citigroup of making had a
causal connection with the loss in value of the SSOL
shares. See also Bastian v. Petren Resources Corp., 892
F.2d 680, 683 (7th Cir. 1990).
II
On appeal, plaintiffs have pointed to evidence in the
record that, they believe, provides that missing link. They
acknowledge that the stock price of SSOL’s competitors
fell just as precipitously as the SSOL price, but they urge
us to take another look at the evidence. The affidavits,
depositions, and documentary evidence in the record
reveal, they argue, that Spatz’s and Citigroup’s misrepre-
sentations were the reason (plaintiffs’ emphasis) for the
decline in SSOL’s share price. This is because SSOL never
had the contracts, revenues, or funding that Spatz re-
peatedly said that it did.
The question we must answer is whether this addi-
tional information was enough to show that the loss in
value of SSOL’s shares was proximately caused by the
defendants’ alleged misrepresentations. See Dura, 544
U.S. at 343. As the Court explained in Dura, it is not
enough to show that shares were purchased at a high
price (whether inflated or not) and later sold at a much
lower price. The reason is that many different factors
might account for the drop in value:
If the purchaser sells later after the truth makes its
way into the marketplace, an initially inflated pur-
chase price might mean a later loss. But that is far
from inevitably so. When the purchaser subsequently

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6 No. 05-4362
resells such shares, even at a lower price, that lower
price may reflect, not the earlier misrepresentation,
but changed economic circumstances, changed investor
expectations, new industry-specific or firm-specific
facts, conditions, or other events, which taken sepa-
rately or together account for some or all of that lower
price.
544 U.S. at 342-43. If the plaintiff cannot prove “loss
causation”—that is, the fact that the defendant’s actions
had something to do with the drop in value—then the
claim must fail.
This court made the same point years before Dura in
Bastian, where we wrote, “[W]hat securities lawyers
call loss causation is the standard common law fraud
rule . . . merely borrowed for use in federal securities
fraud cases.” 892 F.2d at 683. This element of the claim
attempts to distinguish cases where the misrepresenta-
tion was responsible for the drop in the share’s value from
those in which market forces are to blame. See Law v.
Medco Research, Inc., 113 F.3d 781, 786-87 (7th Cir. 1997);
Ryan v. Wersi Elec. GmbH & Co., 59 F.3d 52, 54 (7th Cir.
1995).
Although they try mightily to convince us otherwise, it
seems to us that plaintiffs here are confusing loss causa-
tion, which we have just described, with transaction
causation. Transaction causation is nothing but proof
that a knowledgeable investor would not have made the
investment in question, had she known all the facts. If the
summary judgment record supports the plaintiff only on
that point, and not on loss causation, then the defendant
is entitled to prevail. As we said in Caremark, Inc. v.
Coram Healthcare Corp., “[I]t [is] not sufficient for an
investor to allege only that it would not have invested but
for the fraud. Such an assertion alleges transaction
causation, but it does not allege loss causation. Rather, it

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No. 05-4362 7
is also necessary to allege that, but for the circumstances
that the fraud concealed, the investment . . . would not
have lost its value.” 113 F.3d 645, 648-49 (7th Cir. 1997)
(quoting Bastian, 892 F.2d at 683).
There are several ways in which a plaintiff might go
about proving loss causation. The first is sometimes called
the “materialization of risk” standard. Caremark takes
that approach, requiring the plaintiff to prove that “it
was the very facts about which the defendant lied which
caused its injuries.” 113 F.3d at 648. The second approach
is the “fraud-on-the-market” scenario, which the Supreme
Court discussed in Dura. Under that theory, plaintiffs
must show both that the defendants’ alleged misrepresen-
tations artificially inflated the price of the stock and that
the value of the stock declined once the market learned of
the deception. Finally, Bastian suggests that loss causa-
tion might be shown if a broker falsely assures the plain-
tiff that a particular investment is “risk-free.” 892 F.2d
at 685-86. We explore these in turn to see if plaintiffs
might have raised a genuine issue of material fact under
one or more approach.
We can dispense quickly with the materialization of
risk idea. There is no evidence in this record from which a
jury could conclude that the drop in the value of the SSOL
shares was attributable somehow to Spatz’s or Citibank’s
alleged misrepresentations. The defendants introduced
expert evidence that SSOL lost its value because of market
forces, and the plaintiffs have offered nothing to rebut
that theory—no expert testimony suggesting that the
collapse was caused by the lack of the fraudulently prom-
ised contracts and financing, no evidence that companies
similar to SSOL that had firm contracts survived. Plain-
tiffs’ only expert, David Cohen, considered only the amount
of their damages, not the cause of those damages.
Plaintiffs similarly have not introduced enough evidence
to go forward on a fraud-on-the-market theory. The record

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8 No. 05-4362
affirmatively contradicts the assertion that the value of
the SSOL’s stock declined just when the alleged misrepre-
sentations were revealed. That is what Dura required
them to show, and they did not. Their initial complaint
alleges that it was not until June 2002 that they discov-
ered Spatz’s alleged lies. But by that time—even by May
2002—the price of SSOL’s shares had already collapsed. As
the district court noted, it had “settled to just over two
dollars per share, which was down from sixty-five dollars
per share in June 2000, when the plaintiffs began pur-
chasing SSOL stock based on Spatz’s recommendations.”
In the face of that evidence, summary judgment for
defendants on this theory was inevitable.
The approach that comes closest to satisfying plaintiffs’
burden is the “risk-free” idea. In dicta, Bastian described
this theory as follows:
Suppose a broker gives false assurances to his cus-
tomer that an investment is risk-free. In fact it is
risky, the risk materializes, the investment is lost.
Here there can be no presumption that but for the
misrepresentation the customer would have made an
equally risky investment. On the contrary, the fact
that the broker assured the customer that the invest-
ment was free of risk suggests that the customer was
looking for a safe investment. Liability in such a
case . . . is therefore consistent with nonliability in a
case such as [Bastian].
892 F.2d 685-86. But the next sentences in Bastian
indicate that it would be necessary for a broker to use very
explicit language before loss causation could be proved this
way. In Bastian, the plaintiffs had invested in oil and
gas partnerships that lost value. We noted that “[t]he
plaintiffs in the present case were not told that oil and gas
partnerships are risk-free. They knew they were assuming
a risk that oil prices might drop unexpectedly. They are

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No. 05-4362 9
unwilling to try to prove that anything beyond the materi-
alizing of that risk caused their loss.” Id. at 686. We need
not decide exactly how explicit the representation would
have to be, or even if this approach survives Dura, because
the district court found that there was no evidence that
Spatz ever said that the SSOL investment was free of risk.
This is not surprising, because literally speaking no
investment in the world would meet such a demanding
standard. It is one thing to describe something as a good
investment, and quite another to state that the risk of loss
is something close to zero. It is also worth noting that
“risky” investments are by no means necessarily “bad”
investments: risk can lead to higher returns, as many
market success stories attest.
There is no evidence that Spatz and Citibank fraudu-
lently assured the plaintiffs that the SSOL stock would
survive the collapse in the market that the other stocks
in that sector were experiencing. True, Spatz told the
plaintiffs to hang onto their stock, saying things like “it
was a certain money winner because Smith Barney was
going to include it in all their divisions” and words to that
effect. But this was against the backdrop of publicly
available information suggesting that SSOL was, to put it
charitably, a volatile stock, that had gone from less than
$1 a share in 1999, to $170 a share in February 2000, to
$80 a share in June 2000, back down to $1 a share by May
or June of 2002. Spatz said nothing about how long
someone would need to be prepared to hang onto the SSOL
stock in order to reap the expected benefits, nor did he
say anything about investments in the data services
business being risk-free.
III
Defendants have also argued that the district court’s
judgment can be upheld on several alternative grounds:

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10 No. 05-4362
the lack of actionable misstatements; lack of proof of
scienter; and plaintiffs’ inability to prove justifiable
reliance. Like the district court, we see no need to address
these points, because we find that plaintiffs did not
introduce enough evidence on the loss causation element
to create a genuine issue of material fact. We therefore
A FFIRM the judgment of the district court.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-12-07

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